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Written by Joe Ruff , Midlands News Service
08/29/2008
The Bard had some good advice
Joe Ruff , Midlands News Service
When it comes to lending money to friends or family, say financial
planning experts, little has changed since The Bard was penning
masterpieces in the 1600s.
The basic advice: Don't do it.
"Only if you never want it back,'' said Paul Richard, executive
director of the Institute of Consumer Financial Education of San
Diego. "Don't loan money you never want to give away.''
If you do lend money to a friend or family member, make certain you
don't need it yourself, financial advisers said. Often such a loan,
in effect, becomes a gift.
"Generally speaking, it's a matter of the heart, it's not a matter
of the wallet,'' Richard said.
Family members tend to avoid paying money back, Richard said,
particularly children who borrow from their parents.
"Children feel their parents are pretty well-off and they deserve
the loan,'' said Richard, adding that kids tend to overlook the
principles involved.
Richard was speaking generally, of course. There are exceptions.
Mike Guilliatt, who runs financial planning firm Guilliatt &
Associates in Fremont, Neb., with his son, Mark, said he has a
64-year-old client who recently lent $10,000 to his son to buy a
house. The deal was sealed without a written agreement, and the
father said his son had 20 years to pay it back.
Obviously, the client didn't need the $10,000 anytime soon,
Guilliatt said. In addition, his son is hardworking, and the debt
would be forgiven if he couldn't repay the loan, Guilliatt said.
"It all depends on how much faith you have in your son,'' Guilliatt
said.
There can be tax implications, depending on the size of the loan and
whether the lender charges interest. People who charge interest, or
who contemplate making a loan of more than $10,000, should be
certain they know the tax code or get good tax advice.
Richard acknowledged that hardworkers who don't change jobs and
honor their commitments probably would be good risks if they need
some short-term help.
But all too often, he said, loans made to family members or friends
amount to good money going after bad. Someone who requests a loan to
avoid bankruptcy or some other dire consequence probably is deeply
enough in debt that he'll be back seeking more, he said.
"You're just prolonging the pain.''
Nor can people be certain that cash given to someone will be spent
in the manner discussed, Richard said. Sometimes the person asking
for help with what he says is a house or car payment loan uses the
money for something else, Richard said.
In that case, he advised: Make the house payment yourself insteading
of lending the money to make the payment. Offer to make a trip to
the bank or the dealership and settle the matter with them, Richard
said.
If they object, it might not be a truthful request, Richard said.
Perhaps the best route, in the long run, is to allow the person who
is struggling to lose the house or the car, so he can start over,
Richard said. What he can't afford now he might be able to afford
later.
Even lending someone $10 to see a movie doesn't make much sense,
Richard said.
"Why do you want to go into debt for entertainment?'' he asked.
Web sites such as virginmoneyus.com create, for a fee, loan
documents and loan terms and collect the money. A third party
oversees the loan, which lowers the risk of default.
Virginmoneyus.com also allows more midstream changes to the loan
terms than a bank generally would because the loan is between family
members or friends.
Rhonda Heineman, a financial planner with Egermier Wealth Management
Group in Omaha, said a site like virginmoneyus.com could come in
handy for some people.
Heineman said she has lent money to family members and found some
were good about paying it back and others were not. For example, her
son does well but her daughter has been difficult, she said.
"For my daughter, this -- a third party -- would be the only way I'd
do it,'' she said.
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